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Public universities and the financial meltdown

Until recently, the standard lament from the "public Ivies" on down
had been that the endowment explosion from the elite private schools
had opened up an appreciable gap in resources between public and private
schools.

No longer. The downturn is going to hammer the schools with the
biggest endowments. Those with the smallest -- that would be public
schools -- should be better equipped to ride out the downturn. (my emphasis)

True, Harvard's endowment lost $8 billion (22% of its value) between June and early December, and it could lose much more by the end of its fiscal year in 2009. True, Harvard isn't alone. Many other private universities and colleges are suffering similar losses. Some may suffer even more. True, public universities rely less on endowment income that Harvard, Yale, Princeton, Williams, Amherst, and the like. True, "due to budget constraints, public universities are about to get an influx of better students" (Dan Drezner in a followup post).

But public funds and tuition will do little to cushion the blow at public universities.

Smaller private institutions whose operating budgets are more heavily
dependent on tuition are also having significant problems. Beloit College has axed 40 positions
because of a 36-student enrollment shortfall. My own institution,
Kenyon College in Ohio, has suspended construction on several projects
and has frozen hiring. More pain is likely to come as donors retrench
and parents redirect their childrens' college choices based more on
cost and less on perceived educational advantage. And while public
universities have a temporary economic advantage, that will not last as
state aid is inevitably cut as a consequence of decreasing tax revenues. (Richard B. Hoppe)

So while Dan's probably right that the gap between publics and privates will shrink as a result of endowment collapses, Richard has the more fundamental insight. Any financial advantage public universities have now "will not last as
state aid is inevitably cut as a consequence of decreasing tax revenues."

The top 10% of private universities had endowments about 10 times those of the top 10% of public universities in 2005-2006. They'll still be 10 times ahead, unless by some miracle the portfolio managers at public universities are a lot better than their private university counterparts. If public universities could count on state support and tuition to make up the difference, maybe they could catch up. But according to a report from the National Association of State Universities and Land Grant Colleges, the American Council on Education, the American Association of Universities, and the National Association of Independent Colleges and Universities

While the exact percentage differs from state to state, in 1980, states provided 46 percent of the operating support for public colleges and universities. By 2005, that amount had fallen to 27 percent. During the same period, tuition as a source of revenue increased from 13 percent to 18 percent. The bottom line for public colleges and universities is that tuition increases are merely offsetting reductions in state revenues.

So as much as I'd like to agree with Dan that the current financial crisis will help public universities, I'm afraid I have to agree with Richard instead. It will just leave them further behind.

1I work at a public university after all. I have a selfish interest in having things work out the way Dan predicts.

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A bubble in higher education:With tuitions, fees, and room and board at dozens of colleges now reaching $50,000 a year, the ability to sustain private higher education for all but the very well-heeled is questionable. (emphasis added)Notice the emphasi... Read More